Company Accounts theory

Question 1

What is a Private Limited Company?

Answer 1

This type of company cannot sell its shares on the stock market. It is privately owned and shares can only be sold to relations, friends and employees.
It is recognised by the initials Ltd after its name.
A minimum of 1 shareholder is required to register a private company in the UK. However, there is no upper limit to the number of shareholders a company can have during or after company formation.
It does not have to publish its annual financial statements

Question 2

What is a Public Limited Company?

Answer 2

This is a company which can sell its shares on the stock market to the public.
They are recognised by having plc after their names.
There is no limit to the number of shareholders it may have.
They must publish their annual financial statements.

Question 3

What are the Advantages of a PLC?

Answer 3

• All shareholders in a plc benefit from limited liability.
• Equity can be raised by selling shares on the stock market.
• A plc has a legal identity distinct from shareholders and is unaffected by changes in ownership.

Question 4

What are the Disadvantages of a PLC?

Answer 4

• The setting up of a plc is determined by numerous legal regulations.
• A PLC must publish its financial statements.
• The provision of the Companies Acts restricts the activities of the PLC.
• Shareholders in a PLC are not guaranteed a return on their investment in times of profit.

Question 5

What Key Pieces of Information does the Memorandum of Association include?

Answer 5

• The Name of the company (to include PLC if appropriate)
• Address in the UK of the Registered Office eg Companies House in Edinburgh if it’s a Scottish Company.
• Statement that the liability of its members is limited.
• Details of the intended amount of Share Equity and types of shares eg Preference/Ordinary.
• A Statement of its objectives.

Question 6

What Key Pieces of Information does the Articles of Association include?

Answer 6

• The raising of equity/share allotment/borrowing powers.
• Directors’ remuneration/powers.
• Holding of Company meetings.
• The rights of shareholders.

Question 7

What are Preliminary/Issue Expenses?

Answer 7

These include legal and other expenses (printing etc) incurred when a company is formed.
When such expenses are large they are often capitalised with a proportion being written off each year. They can be written off against any balance of the Share Premium Account or they should be written off in the Income Statement in the bottom section.

Question 8

What is Authorised Shared Equity?

Answer 8

The Authorised Equity of a company is the maximum amount of share equity that the company is permitted by its constitutional documents to issue (sell) to shareholders.

Question 9

What is Issued Shared Equity?

Answer 9

This is the amount and types of shares which have been issued (sold) to the public. This is shown in the Equity section of the Statement of Financial Position.

Question 10

What is Ordinary Shares?

Answer 10

These types of shares allow shareholders to attend and vote at all shareholder meetings held by the company. The dividends paid to shareholders will vary and depend on the profits made by the company eg in a high profit year it may be set at 10% of a shareholders investment. The rate of dividend on ordinary shares can be ‘passed’.

Question 11

What is Preference Shares?

Answer 11

Unlike Ordinary shares these generally carry no voting rights. Preference shareholders are paid a fixed rate of dividend eg 5% of investment each year. In the event of liquidation Preference shareholders may have preference as to repayment other the Ordinary shareholders

Question 12

What is Share Premium?

Answer 12

This is a reserve which will exist when the company sells shares at a later date for a higher price than the original selling price eg 100,000 shares sold at £1.50 when the original price was £1. The extra 50p per share is put in to a Share Premium reserve.

The Share Premium is shown in the Statement of Financial Position as a Reserve. It is not available for distribution to shareholders but can be used to write off preliminary expenses or make a bonus issue of shares.

Question 13

What is a Bonus Issue?

Answer 13

This is when current shareholders are given free shares by the company eg 1 for every 4 held. The company will cover the cost of this usually from the Share Premium Account. This encourages loyalty from existing shareholders.

Question 14

What is a Rights Issue?

Answer 14

This is a method of raising finance by issuing shares to existing shareholders in proportion to existing shareholding eg 1 for every 4 held. Unlike a bonus issue, shareholders have to pay for these shares. This is a cheap method of raising finance for the company. Shares are usually sold below the current market price in order to encourage shareholders to buy.

Question 15

What are Debentures?

Answer 15

These are long term loans to a plc. They are bought by investors who wish to lend to a company and in return receive an annual fixed interest payment. Debenture Interest is shown as an expense in the Income Statement therefore Debenture holders are entitled to interest regardless of whether a profit or loss is made by the company. Debenture holders are creditors of the business and not owners. They have no voting rights and are first to receive the repayment of their loan in the event of liquidation. This makes debentures a safe form of investment.

Question 16

What are Provisions?

Answer 16

This is an amount of profit retained in the business to meet an expected loss. They do not contain sums of money. The most common provisions you will see are Provisions for Depreciation and Provisions for Bad/Doubtful debts.

Question 17

What are Reserves?

Answer 17

These are not charges against profits (expenses) but an appropriation of profits. Reserves can either be Capital Reserves or Revenue Reserves. Both are shown in the Reserve section of the bottom half of the Statement of Financial Position.

Question 18

What do Capital Reserves include?

Answer 18

Share Premium Reserve and Revaluation Reserve.

Question 19

What do Revenue Reserves include?

Answer 19

the Unappropriated profit of the business.

Question 20

What does the Manufacturing Account calculate?

Answer 20

Cost of Raw Materials Consumed
Direct Costs
Prime Cost
Indirect Costs
Factory Cost of Production
Profit on Manufacture

Question 21

What does the Income Statement up to Gross Profit calculate?

Answer 21

the profit on buying and selling the inventory (gross profit)

Question 22

What does Income Statement up to Unappropriated Profit for this Year calculate?

Answer 22

This section of the Income Statement will deal with the Expenses (running costs) to the business as well as any ‘Other Income’ items. This will result in a Profit for the year before tax being established. Tax will then be deducted based on this figure which will leave a Profit for the Year after tax. From this amount ordinary and preference share dividends will be deducted, as well as the writing off of Goodwill or Preliminary expenses.

Question 23

What does Statement of Financial Position Calculate?

Answer 23

This statement deals with what the business owns (assets) and what the business owes (liabilities), it will also highlight what the business is worth (top and bottom half totals). The equity structure of the business can also be seen on this financial statement.

Question 24

When setting up a PLC which 2 documents must you lodge?

Answer 24

memorandum of association and articles of association

Question 25

What are the main sources of finance for PLCs?

Answer 25

Preference Shares, Ordinary Shares and Debentures (POD)

Question 26

What sources of finance can also be used by a PLC but also by every other type of company?

Answer 26

Bank Loans, Government/EU Grants and Mortgages